The following is a guest post by FarmTogether, a leading online marketplace that provides accredited investors with direct access to institutional-grade farmland. FarmTogether is a long-time supporter of Financial Samurai.
The mainstreaming of alternative investments and farmland investing is picking up steam. For example, FarmTogether recently closed on the largest single-asset crowdfunded farmland investment to date: a 201-acre organic redevelopment in Franklin County, Washington (Galaxy Organic Apple Orchard) – a $22.28M deal.
Meanwhile, on February 8, 2021, Tesla announced that it had bought $1.5 billion worth of Bitcoin. Tesla also said it would start accepting the currency as payment. This news helped send the price of Bitcoin up from just under $39,000 to now roughly $58,000 today. Several companies have already jumped on the Bitcoin bandwagon and added the cryptocurrency to their balance sheets. More companies may soon follow.
This is but one example of a wider trend of increasing mainstream acceptance of alternative investments as an essential component of a portfolio. Institutional investors have been increasing their allocation to alternatives in search of diversification and potentially higher returns.
Thanks to a range of technology-enabled platforms, more and more alternative assets are accessible to individual investors as well. Read on to find out why alternative investments are so popular and how you can add them to your portfolio.
What Are Alternative Investments?
Alternative investments include any investment outside of “traditional” investments like stocks and bonds. Alternative investments vary in terms of their liquidity and investment horizon.
While some investments like mutual funds, ETFs and REITs, are highly liquid and can be traded through a brokerage account similar to a stock, the majority of alternative investments are less liquid than publicly traded assets. Alternatives generally have a longer investment horizon.
Examples of less liquid, longer-dated alternative investments include venture capital, private equity, hedge fund investments, and farmland. In these cases, investors’ capital can be tied up for five years or more. Selling assets prematurely can be more costly due to less liquidity.
The Benefits Of Alternative Investments
Despite that seeming disadvantageous, alternative investments are attractive to investors for several reasons.
First, a benefit of lower liquidity is that alternative investments have less visible volatility than public securities. As a result, when markets are volatile, investors tend to asset allocate towards alternative investments.
Adding alternatives to a portfolio increases diversification, which is a second benefit for building long-term wealth. Alternative investments can also offer above-market returns compared to stocks and bonds.
For example, according to the USDA, US farmland returned an average of 11.5% per year. In comparison, average 10-year stock market returns have historically been around 9.2%. Of course, past performance is not a guarantee of future performance.
However, capital is always seeking investments with greater returns. And with the success of various alternative investments over recent years, the trend will likely continue.
Institutional Investors Continue To Demand Alternatives
Since Yale University began leading the way on alternative investments in the 1980s, a wide range of university endowments, pension funds, and other institutional investors have followed suit.
These institutions have a longer investment horizon, meaning alternative investments are a good match for their cash flow. For institutions, foregoing some liquidity in exchange for better returns is an easy trade-off.
In recent years, the trend towards private capital has snowballed. As of June 2020, the 10 largest funds globally kept an average of 23% of their assets in alternative investments according to The Economist.
For example, a full 77% of Yale’s ~$31 billion endowment is in alternatives. McKinsey found that in the past decade, the total size of private assets under management has increased by over 170%, to around $6.5 trillion globally.
The Growth In Farmland Investment Funds
This mainstreaming of alternative investments has led to a proliferation of private equity investors and specialty firms. McKinsey notes that in the past ten years, the number of private equity firms has more than doubled. Niche investment funds are also on the rise.
Valoral Advisors, a global food and agricultural investment advisory firm, notes that the number of firms focused on farmland investing has skyrocketed.
In 2005, farmland investing was a relatively niche sector covered by 19 funds. Today, the number of firms focused on farmland investing is up to 166 funds, an average annual increase of nearly 16%.
The trend towards alternative investments shows no sign of slowing down.
Preqin, one of the largest data and services business in the alternative assets world, conducted an investor sentiment survey in April 2020. The survey found that 29% of investors planned on increasing their exposure to alternatives in response to the COVID-19 pandemic.
Why do institutional investors continue to pile money into alternative investments? In short, they’re still betting on better returns. A survey by Nataxis, a research and asset management firm, last year found that a full 71% of investors thought the returns offered by private investments justified the reduced liquidity. This is supported by McKinsey’s research as well.
Nataxis found that median fund managers realized an IRR on their investments of ~12%. While top fund managers outperformed public markets by a significant margin.
The Increase Availability Of Alternative Investments
The mainstreaming of alternative investments is not only driven by demand, but by increased availability as well. Not only are institutional investors increasing their allocations towards alternative investments, so are individual investors.
An older survey by AMG Funds found that 83% of Millennials are open to including alternative investments in their portfolios. The survey polled approximately 1,000 affluent individual investors with over $250,000 in household investable assets on their forward expectations regarding equity markets and the macroeconomic environment.
Fortunately for individuals, technology is democratizing the world of alternative investments. Previously, investing in alternatives required extremely high minimum investments. Further, you needed personal access to sophisticated financial and legal advisors, among other barriers.
Now, thanks to the boom in technology-enabled investment platforms, you don’t need Bill Gates’ level wealth to invest in alternative investments any longer.
The Rise Of Farmland Investing
Farmland is a good example of an asset class that has become significantly more accessible to individual investors in recent years. Its attractive qualities for investors include: low volatility, potentially higher average returns, inflation hedging, and support from strong market fundamentals.
The price of food tends to increase in lockstep with inflation. So, as inflation rises, so does the price of food, as does the value of the land that produces it. With the 10-year bond yield surging since its bottom in August 2020, the expectations of higher inflation are building.
Dwindling farmland supply and increasing population growth is also a long-term fundamental tailwind for farmland investors. Despite these attractive characteristics, individuals have only recently begun investing in farmland. Historically, individual farmland investing has been stymied by high costs and lack of transparency in the market.
Investing With FarmTogether
FarmTogether is helping democratize farmland investing to more investors. FarmTogether’s intuitive platform offers accredited investors a one-stop shop for farmland investing. Investors can view curated investments, read diligence materials, sign legal documents and monitor their portfolios all in one place. In addition, FarmTogether is open to investors with a minimum investment of only $15,000.
Individual investors have several options for investing in alternatives. Investments can be made directly on the FarmTogether platform, or through a vehicle known as a self-directed IRA. This is yet another example of how mainstream alternative investments have become. Since the majority of Americans’ investable assets are in retirement accounts, this opens up the benefits of alternative investments to more investors than ever.
In 2020, FarmTogether saw 178% user growth on their platform as investors sought alternative assets and ESG options (environment, social, governance). With heightened stock market volatility, the difficult performance of bonds, rising concerns over inflation, and an emphasis on sustainability, demand for farmland investing continues to be robust.
To explore new farmland investment opportunities, click here.
For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.